The action, however, comes even before government security agencies like Financial Intelligence Unit have offered any views on Bitcoins to the monetary regulator.
The RBI action has a clear back-end concern, though. Bitcoins could rapidly become a perfect medium to launder money. Allied with the sudden rise in interest among some Indian companies and investors in accepting Bitcoins and a shadow world of competitor for the Indian rupee has just opened up.
“The RBI is presently examining the issues associated with the usage, holding and trading of VCs under the extant legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations,” the advisory states. But it also holds the offer of allowing the poor to access virtual money without having to possess a credit or debit card. And former US Fed chief Ben Bernanke acknowledged that there are no regulations that make the use of Bitcoins illegal.
To be effective, the government will have to rewrite the Foreign Exchange Management Act. But for RBI the headache is immediate. It is already waging a struggle against another shadow market — the nondeliverable forwards market in the rupee at offshore destinations. The impact of Bitcoins at a microscopic level, in comparison can, however, spring unpleasant surprises soon.
The concern has increased after China’s central bank regulated the digital currency for the first time on December 5 by banning financial institutions and payment providers from conducting transactions in Bitcoins.
Last week, China blocked the country’s Bitcoin exchanges from accepting new inflows of cash, a move that hit virtual currency in its biggest market and sent its value plummeting by 50 per cent.
Several unofficial Bitcoin websites had sprouted within India. “Buy sell Bitcoin in India online. Sell Bitcoin and get paid in your account within 2 hours,” says the website of buysellbitco.in. The value of one Bitcoin on Monday was Rs 41,726.
When contacted, an official of buysellbitco.in office in Ahmedabad, “You can register with us and start trading in Bitcoin. You have to submit your PAN card and and bank details. You have to create a Bitcoin wallet in your computer which can be downloaded. Once the verification is through and wallet is created, you can buy and sell the e-currency. The price of Bitcoin has gone up from around $200 to $700 in the last one year.”
But on Thursday it had posted a notice on its website saying, “Post the RBI circular, we are suspending buy-and-sell operations until we can outline a clearer framework with which to work. This is being done to protect the interest of our customers and in no way is a reflection of Bitcoin’s true potential or price.”
Another entity, INRBTC also said that “in light of RBI’s notice, services of INRBTC.com are being suspended indefinitely”.
Before the ban, buysellbitco.in claimed it had around 1,500 customers. “They are buying and selling to make money... it’s speculative business. Volume has also increased. The entire business is done online,” he said, refusing to divulge details about the transactions.
So why are Bitcoins so popular? “First of all, they provide an almost anonymous and secure means of paying for goods. After government surveillance stories hit newspaper headlines in 2013, there is perhaps little surprise that people are looking for alternative forms of payment. Secondly, there is perhaps little doubt that they are also popular with cybercriminals, who are looking at ways to evade the law,” said a report by Kaspersky Security Bulletin.
“As Bitcoin becomes more popular, it will be interesting to see if there is any government crackdown on the exchanges in a bid to safeguard the system. Any collapse of the Bitcoin business can have ramifications in the entire financial world,” said an analyst who tracks the e-currency.
BITCOIN FACT FILE
A bitcoin is a crypto currency on the internet. It appeared in 2009 as a currency unit just after the global meltdown. The first Bitcoin ATM opened in Vancouver in Canada in October 2013
PRODUCTION: Bitcoins are “mined” based on a pre-defined mathematical algorithm and is a reward for carrying out computational operations that aim at discovering the solution to a random mathematical puzzle. There is no central bank or monetary authority that controls its production
USAGE: To use Bitcoin, one needs to download the software from Bitcoin.org. The software acts as a bank account. It stores a secret code on the user’s computer which enables funds to be spent from one’s bank account or ‘wallet’
BENEFIT: Bitcoins have absolutely no counter-party risk to hold and transfer. The only risk is of bitcoins being lost if your computer crashes. It is possible to back up the wallet file on a USB drive and even email it.